When I returned last weekend from a week off the grid I encountered the word “bubble” over and over again when referring to the tech industry. A variety of people were using it to describe the current situation. This has been going on for at least a quarter or two, but the velocity of it seems to have picked up with a wave of high priced financings along with large financings for nascent companies. While plenty of tech bloggers were tossing around the word “bubble”, I also noticed it among the mainstream media. But more interestingly I saw it in my twitter feed from some entrepreneurs and VCs who I respect a lot. So I spent some time on my run yesterday rolling the idea of a bubble around in my head.

In the tech industry, the great Internet bubble inflated between 1999 and 2000 and deflated (or popped) in 2001. I remember it well as 2001 was easily the most challenging year of my business life. I made a lot of mistakes in 1999 and 2000 that I’ve hopefully learned from (I believe I have) and took on a lot of challenging things between 2001 and 2005 which laid the groundwork for the business context that I find myself in today. So, in hindsight, the great Internet bubble of 2001 was very powerful and useful to me, even though it was very painful.

I refuse to make predictions as the only thing I know with certainty is that some day I will be dead. I view predictions as irrelevant in the context of what I am working on and trying to accomplish. Sure – I pay attention to what is going on around me, have hypotheses about what’s going to happen, and adjust my behavior accordingly. But I think making predictions with certainty such as “we are in a bubble” are useless, especially in the absence of recommendations about what to do to either defend against or take advantage of the situation.

I find this discussion about bubbles especially bizarre and entertaining against the backdrop of the downward economic cycle of the past few years. In 2008, everyone in business and politics was consumed with the “global economic crisis”. However, entrepreneurs just put their heads down and continued to accelerate the current web revolution which started around 2004 with “Web 2.0” being articulated by Tim O’Reilly. Today, there is once again enormous focus on entrepreneurship as the salvation for many things, with the naysayers starting to say “but it’s a bubble” or some variant.

If you recognize that we are in a strong, positive, upward segment of the current “tech company creation cycle”, that’s more than enough. You should accept that we’ll be back in a downward part of the cycle at some point, but that we don’t know if it’ll be in a week, month, year, or decade. We also won’t know the slope of the curve although if you are a hedge fund trader you probably think you can calculate the derivative of some equation about the future that will tell you what to buy and sell. Whatever – have fun and good luck.

If you are an entrepreneur, you can build a significant, powerful, sustainable business taking advantage of market expansion during the up cycle and consolidating your position during the down cycle. Don’t get distracted by speculating about “bubbles” other than the ones in your bathtub. Instead, spend your energy creating amazing products, thrilling your customers, building an awesome organization, and living your life. Always remember that one day you too will be dead.

You talk and we listen Brad. Between this and the Ben Horowitz post on the same it just seems like a distraction and coffee shop topic of the moment. After reading this, I think you’re right. It’s tired and out of our hands. I’ll go ahead and concentrate what I can control. Why shoot the breeze about it when you can be about it I suppose. Thanks as always. Please keep writing.

I dont think its fair to group all the people using the term “bubble” as naysayers, anymore than its fair to group all tech companies under the bubble umbrella.

Its not negative to recognise there are a lot of people currently getting crazy valuations for “projects” and having them deemed “businesses” just because they wrote a nice looking piece of code. Its not anti economic growth, its pro common sense.

Real people are putting real money into funds and trusting the judgement of so called professionals to manage their investment. When the inevitable happens, the fall out will impact a much wider audience.

We are living through a time when “businesses” are hiring people with the title of director of monetization! Seriously??? If that doesn’t remind you off 1999 then I dont know what will.

I remember a time when the job of the founder was revenue generation. I turned 40 this year and its topics like this that make me feel every year of it. We might have monetization (still not in my spell checker thankfully) now, but eyeballs have just been replaced with “users”. I see little difference. Bring back the term customer and i will feel all is right with the world again. #wecanbutdream

I was writing about the Colorado tech/VC scene from about 1999 to 2002. The crash certainly took the money out of the marketplace and we folded eMileHigh because there wasn’t going to not goingas uncomfortable with the highs and stop investing. So I didn’t buy at the market’s peak, but I regret the extra step and getting out of the market at it’s peak. I stuck to a buy-and-hold approach, but I waited years for my portfolio to recover. Now I don’t want to make the same mistake be enough ad and sponsorship money to support it. I didn’t anticipate the severity of the crash in advance, but I wagain. So while the talk of a bubble may be irrelevant to entrepreneurs, I’m paying attention. It confirms my instincts about things getting too high again. I’d rather lock in some profits, wait until it comes down, and then reassess.

It looks like my comment was garbled for some reason. Here it is again:

I was writing about the Colorado tech/VC scene from about 1999 to 2002. The crash certainly took the money out of the marketplace and we folded eMileHigh because there wasn’t going to be enough ad and sponsorship money to support it. I didn’t anticipate the severity of the crash in advance, but I was uncomfortable with the highs and stop investing. So I didn’t buy at the market’s peak, but I regret not going the extra step and getting out of the market at it’s peak. I stuck to a buy-and-hold approach, but I waited years for my portfolio to recover. Now I don’t want to make the same mistake again. So while the talk of a bubble may be irrelevant to entrepreneurs, I’m paying attention. It confirms my instincts about things getting too high again. I’d rather lock in some profits, wait until it comes down, and then reassess.

Scott Sambucci

No one lives forever, no one. But with advances in modern science and your high level income, it’s not crazy to think you can live to be 245, maybe 300.

A great post indeed! I was also holding my IT venture during 1999-2002. I lost my business then. But not owing to the market conditions. There were a couple of more companies who were my contemporaries then in my business line and they are doing well even today. Recession is a natural cycle. An entrepreneur won’t get impacted by ‘bubbles’ if he had chosen a potential business idea and working constructively with no hype. Every business venture inherently bears risk and it should plan for strong policy for risk mitigation which otherwise it can face the failure irrespective of market conditions. The word bubble is more relevant to VCs who should cautiously tread their investment portfolio than to the entrepreneurs who should work on the strength of business idea.http://blog.epmworld.in

I completely agree with your assessment. Not sure if its the best analogy but I liken the current “bubble” talk to a game of golf. You play the game the best to your abilities (with practice, solid fundamentals), awareness of what’s around you (creeks, sand traps, and rough is like navigating relationships, partners, and clients) but you don’t try to concern yourself with what you competitors are doing.

This is an excellant post and on the right time… as entrepreneurs who are building startups nowadays we keep hearing about the buuble and its affect to us..

It make us think that its maybe a good time to add the business modle and generate revenue, rather then go with traction based on users…it seems like a more “stable” or “real” business when ppl pay for your product…

as a bootstrap startup we try to find the balance between the two approches… we are inspired by your words “Instead, spend your energy creating amazing products, thrilling your customers, building an awesome organization, and living your life. ” WE LIKE IT 🙂

Have to disagree. If one knows that one is getting towards a peak in a business cycle there are several smart moves that can be made. Such as making a decision to build up ones cash reserves. That will add lasting power through the down side of the cycle and for many will end up being the different between bankruptcy and being there when the cycle turns upward again.

Bubble or no bubble, what is your view of the startups at the seed level who will make it to Series A? My thinking on this (and I could be entirely wrong) is that with so much seed capital available, there are so many startups focused on crowded spaces, and that when the time comes to sit down for a larger Series A, the winners begin to emerge, leaving behind a larger group of who didn’t make it. If that may be the case, what then?

I’ve written about this in the past and agree that many of the companies
that raise seed money won’t be able to raise the next round. However, this
is no different than at any other point in time and is just part of the
startup cycle, although the absolute magnitude may vary some.

I’ve no idea if a bubble is coming but what I do know is that many social media technologies do not have clear distribution channels. Think about it for a second. These tech companies try to sell to agencies but agencies make no money from platform plays. And while brands might like the tech – they really need an integrated ROI driven program – not a tech toy that is cool.

As a result, IMHO adoption is very very constrained.

TBH — I wish VCs would talk to marketers in evaluating marketing tech. Why? Because most social tech is developed by technologists – not us “practitioners.” The expected result is that many technologies are cool but really not useful for marketers to integrate.

Case in point — Big Door which I really love needs help to make it commerce friendly (I have had a few chats with the team there including Keith).

Bottom line – without a clear way to get this stuff into the marketing world – I just see more and more tech coming out with less and less market access.

Is that a bubble? Got me – but I may too much “in the trenches” … and I cant see the forest at all.

Thanks for spending time with Keith and the BigDoor folks! I agree that
these companies need to focus medium term on solving real problems, not just
creating cool tech.

Anonymous

Great last paragraph, and overall I agree with your points.

That said, as a former student of the venture asset class, I’m intrigued by what’s going on:
1) It’s getting easier for startups to raise seed capital (particularly in SFO, NYC and Boston);
2) We’re seeing larger venture funds being raised for opportunistic late-stage investments; and
3) Secondary markets are providing liquidity to company employees and even investors.

So here are my questions:
1) If founders and early stage investors can achieve significant liquidity without an exit event ever occurring, what will be the long-term impact on their companies?
2) How will late-stage investors and secondary market investors achieve liquidity? Re-selling to new secondary investors?
3) How do you accurately value a private company as a secondary market investor? How big does the secondary market have to get before some sort of company information disclosure is required?

My primary concern isn’t necessarily a bubble, but rather investor groups taking advantage of the buzz they can create by investing in a company to drive up secondary market value and then flipping their shares. I don’t know if there can be a secondary market bubble, but wealthy individuals chasing trendy deals could definitely end up getting burned.

Will be interesting to follow peripherally, but as you advise, my focus will remain on my company.

First of all, I think this “bubble” is related to the uncertainty in larger markets, like the national stock exchanges and government debt. People don’t want to invest in stocks after being burned and after the run-up and uncertainty, they don’t want to invest in Treasuries with the U.S.’s deficits, they are hesitant to invest in gold at such high prices, and the risk of inflation discourages holding cash. So, that leaves private investment, like venture capital and the secondary markets, which have great historical returns and have been bull markets recently. I don’t understand why people are surprised there is a bubble here… it was a natural spot to park spare cash, in my opinion. It will only take improvement in other markets or the deterioration of these returns to spark a change of trend.

Second of all, and more related to your post, bubbles (that aren’t macro bubbles affecting consumers) are simply changes in the flow of capital. I’d guess that most start-up companies don’t really need a ton of capital – they just use capital to grow more quickly. In fact, having less capital available might even encourage better practices (like leaner start-ups that become more profitable for those involved). The only downside may be slower growth and fewer bad ideas making it farther along, if capital does dry up. All in all, a net positive (or at least neutral) for entrepreneurs, assuming consumers aren’t affect (which is a whole different story).

Thinkbiz

Thanks Brad. Seems to me that if an idea is good enough, it should be amazing on the up-cycle and at least good enough in the down one. Not a law, but a personal mantra I follow.

The naysayers like to appear informed and sophisticated by identifying “bubbles” way too often. A true bubble causes an enormous mis-allocation of resources, both financial and human. It is not to be confused with a period of rapid innovation or bullish financial market. During the Internet bubble, I’m sure companies were created with a cynical horizon that did not extend past the IPO lockup period. As for human capital, my favorite example is Lou Dobbs quitting his perfectly good job as CNN financial anchor to become the CEO of Space.com (“Earth to Lou. Earth to Lou…”). He slinked back after the bust.

If pundits knew the hallmarks of a bubble, the term would be used much less frequently.